Taxes are pretty much unavoidable and will always be something you will have to deal with continuously throughout your life. This is even true for business owners, entrepreneurs, and self-employed workers. If you own a small business, you should understand the various types of taxes that you may be liable for.
Small business owners are generally liable for federal, state and many times local taxes. The type of business you operate will determine what type of taxes you will need to pay.
All businesses are required to file income tax returns even if the business was not overall profitable for the tax period. The type of business structure you have will determine which tax forms you need to file and how the income is taxed. For example, a sole proprietorship will pay income taxes via the owner’s personal tax return. Partnerships and limited liability companies (LLCs) have to file separate tax forms, but the income is passed through to the individual owners. Corporations pay their income taxes at the business entity level and have their own corporate tax rates.
If you do business as a sole proprietorship or a partnership you will have self-employment tax liabilities. These taxes are your contribution to the Medicare and Social Security systems.
Payroll and employment taxes
A business with employees is required to pay taxes which are contributions to Social Security and Medicare. This is similar to self-employment taxes, except you are paying contributions on behalf of your employee, as opposed to for yourself as a self-employed worker. You will withhold half of the employment taxes owed from your employee’s pay while you cover the second half of the taxes due with your business’s money.
Businesses are subject to a category of taxes known as excise taxes. These taxes include environmental taxes, fuel taxes and taxes on the sale and use of specified items. Excise taxes are due once per quarter but are not paid by all businesses.
So far, the taxes discussed are levied by the federal government. However, state governments also charge taxes which businesses are liable for. Most states will require businesses to pay taxes to fund workers’ compensation and unemployment insurance.
Some states also require payments to fund temporary disability insurance. Businesses that operate in more than one state may find themselves liable for taxes in multiple states. Additionally, many states charge certain types of businesses franchise taxes for allowing the business to operate in the state.
State and local jurisdictions charge businesses sales tax for each sale of a product and even some services. Sales tax is collected from the consumer by the business and is then paid to the relevant government agency.
Real estate tax
Local governments will also levy real estate taxes if the business owns real property. The amount of real estate tax liability is calculated in the same way as for individuals which is based upon the market value of the real estate.
Create a tax planning strategy
How business owners should deal with taxes will depend on how the business model is structured. Businesses come in all shapes and sizes which require your financial planning to be customized to your own individual needs. A competent financial planner as well as qualified tax professional should be able to help you make sure your business tax planning strategy fits into your overall financial goals for the business as well as your own family financial planning.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.